Richard Thaler

As implausible as it may seem, here is a statement that almost everyone in Washington can agree with: Congress has self-control problems. This may just be a sign of democracy. We elect those who share our frailties. We Americans eat too much, take on too much debt, save too little and put off anything mildly unpleasant as long as possible. Psychologists and behavioral economists have studied these kinds of problems for decades. We know, for example, that children have trouble waiting even for a few minutes to get three marshmallows if they can have one now, and they find it particularly hard if they have to look at those luscious treats while waiting.

Social Security may be the most beloved of all the government’s programs, partly because it requires so little thinking. You pay taxes while you work, then you and your spouse collect until you die. This description oversimplifies things, of course. Social Security, as it’s currently constituted, is refreshingly straightforward but you do have to make one important choice, and many people could make their lives after retirement better if they chose differently.

Imagine a set of 65-year-old identical twins who plan to retire this summer after long careers. We’ll call them Dave and Ron. They have worked for different employers and have accumulated retirement benefits worth the same amount in dollars, but the benefits won’t be paid out the same way.

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principle he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

1) Asked about what scientific concept would improve everyone’s cognitive toolkit, “Richard Thaler proposes attaching the word “aether” to substitute for any variable that is asserted rather than proven — so, “business aren’t investing because of aether,” as opposed to “businesses aren’t investing because of uncertainty,” writes Ezra Klein.

In recent drafts, New England has made six first-round trade-downs. The Flying Elvii are following the Massey-Thaler prescription. These academic economists contend that low draft picks actually are worth more than high picks, because the odds of finding a good player are the same, but the signing-bonus expense declines. Bill Belichick is the sole NFL draft-master to have taken the economists’ advice. The Patriots also hope to tab University of Chicago economist Richard Thaler, but only after repeatedly trading down to get Thaler cheaply.

In his new NYT column, Richard Thaler offers a guiding principle for policymakers thinking about rules around how personal data can and should be collected and disseminated.

If a business collects data on consumers electronically, it should provide them with a version of that data that is easy to download and export to another Web site. Think of it this way: you have lent the company your data, and you’d like a copy for your own use.

This month in Britain, the government announced an initiative along these lines called “mydata.” (I was an adviser on this project.) Although British law already requires companies to provide consumers with usage information, this program is aimed at providing the data in a computer-friendly way. The government is working with several leading banks, credit card issuers, mobile calling providers and retailers to get things started.

Consider this scenario: Having decided that charitable giving is a worthy cause, the government subsidizes charitable gifts from certain households, and for those chosen to be part of the plan, every dollar donated to a charity is increased by a specified percentage. To qualify, taxpayers must have a substantial home mortgage; the subsidy rate increases with taxable income. Low-income taxpayers receive no subsidy, but donations from qualified high-income taxpayers are subsidized by as much as 40 percent — or more.

At this point, you may be wondering why I’d even mention something so preposterous. After all, why should a family’s eligibility for a donation subsidy depend on whether it has a large mortgage? And why should the government subsidize donations by the rich more than donations by the poor? The idea seems a nonstarter. And it would be, if not for one important detail: it is (approximately) the current law.

We know there are quite a few Nudge blog readers living and working in London, a city that Richard Thaler has been traveling to regularly over the past few months. He’ll be there again in a few weeks, this time wearing his professorial hat rather than his behavioral adviser one. Thaler will give a luncheon keynote titled “The Behavioural Economics of Regulation: Lessons from the Financial Crisis, the Oil Spill, and the World Cup” at a Booth School of Business symposium.

Thaler’s talk, on Saturday December 4th (from 11:30-2 p.m.) is part of a full weekend of Booth events. The lunch will be at the Institute of Chartered Accountants Hall, 1 Moorgate Place, London, EC2R 6EA, and tickets are £60 (that includes all the talks, not just Thaler’s.) More information is here.

I have thought about whether the 45 percent tax rate might be so high that it is on the downward sloping part of the Laffer Curve, that is, past the point where revenues are maximized.

Arthur Laffer’s idea, that lowering taxes could increase revenues, was logically correct. If tax rates are high enough, then people will go to such lengths to avoid them that cutting taxes can increase revenues. What he was wrong about was in thinking that income tax rates were already so high in the 1970s that cutting them would raise revenues. George H. W. Bush famously called this Voodoo Economics.

Is it possible that lowering the estate tax rate to, say, 35 percent, could increase revenues?

About

The Nudge blog is the online companion to Richard Thaler and Cass Sunstein’s “Nudge: Improving Decisions About Health, Wealth, and Happiness.” Here you’ll find much more about nudging, choice architecture, libertarian paternalism, and many other terms you won’t read about in standard economics books.

Cass Sunstein is currently the Administrator of the White House Office of Information and Regulatory Affairs and has no affiliation with the Nudge blog.

The Nudge blog is edited by John Balz.

Tell us about a nudge

The possibilities for great nudges are everywhere. For a list of favorites from the book, check out our dozen nudges. We invite readers to send their own nudge suggestions to nudgeblog@gmail.com.

What is Choice Architecture?

Decision makers do not make choices in a vacuum. They make them in an environment where many features, noticed and unnoticed, can influence their decisions. The person who creates that environment is, in our terminology, a choice architect. The goal of Nudge is to show how choice architecture can be used to help nudge people to make better choices (as judged by themselves) without forcing certain outcomes upon anyone, a philosophy we call libertarian paternalism. The tools highlighted are: defaults, expecting error, understanding mappings, giving feedback, structuring complex choices, and creating incentives.

For a user-friendly introduction to choice architecture, check out this paper.